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 Richmans' Trade and Taxes Blog

Now Korea is Cleaning Our Clock
Howard Richman, 6/29/2012

On June 19, Pat Buchanan wrote a commentary (Now Korea is Cleaning Our Clock) about the initial results of the Korea US free trade agreement (KORUS). He begins:

“The entry into force of the U.S.-Korea trade agreement on March 15, 2012, means countless new opportunities for U.S. exporters to sell more made-in-America goods, services and agricultural products to Korean customers — and to support more good jobs here at home.”

Thus did the Office of the U.S. Trade Representative rhapsodize about the potential of our new trade treaty with South Korea.

And how has it worked out for Uncle Sam?

Well, courtesy of Martin Crutsinger of The Associated Press, the trade figures are in for April, the first full month under the trade deal with South Korea.

And, surprise! The U.S. trade deficit with Korea tripled in one month. Imports from South Korea jumped 15 percent to $5.5 billion in April, while U.S. exports to South Korea fell 12 percent to $3.7 billion. Suddenly, the U.S. trade deficit with Seoul surged to an annual rate of $22 billion.

This result was predicted by the Economic Policy Institute, as pointed out by Sam Williford back on March 21 2011 (NAFTA Is Proof that KORUS Will Be Disastrous), when he wrote:...

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Mercantilism eats Free Trade
Howard Richman, 6/27/2012

Brian O'Shaghnesssy, chairman of Revere Copper Products, pointed out in a June 16 commentary (Mercantilism eats Free Trade) that the United States is losing jobs because of our failure to oppose mercantilism. He knows what he is talking about, because he knows what is happening in the business world. For example, he writes:

Revere ships its coils of copper and brass to other manufacturing companies largely in North America. Since the year 2000, more than 30% of the facilities that Revere shipped product to have shut down and moved offshore, mostly to China.

In the last ten years, multinationals have removed 2.9 million jobs from the U.S. economy. During that same time they added 2.4 million jobs in other countries like China ­ because of governments that provide low cost loans, low cost electricity, grants, tax breaks, and duty exemptions. These countries also provide the benefit of VAT taxes and currency manipulation.

Today, China buys trees from South America, ships them to a paper plant in Shanghai, produces the paper, and ships the paper to Chicago for less than a paper mill in Wisconsin using trees grown in Wisconsin! This doesn’t make sense until you understand the impact that subsidies, VAT taxes and currency manipulation have.

Until the United States finally opposes mercantilism by requiring balanced trade, countries like China will continue to steal our rmanufacturing jobs and our children's economic future. He points out:...

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Does China Have a "New Economic Policy" for Dealing With Foreign-Owned Enterprises
Raymond Richman, 6/21/2012

Dr. Derek Scissors of the Heritage Foundation in testimony before the U.S-China Economic and Security Review Commission in March, 2011 described the fall and subsequent rise of Chinese state-owned enterprises. From 1993-2001, the state sector shrank but from 2008 it grew and currently predominates over the private sector. What is the future of the private sector in China? We believe there is a good likelihood that all foreign enterprises in China will eventually be nationalized.

The Chinese Communist strategy can be divined by studying Lenin’s New Economic Policy (NEP), which lasted from March, 1921 to 1929. It became necessary because of the shortages of food that reigned as a result of the policy of forcing farmers to “sell” all their product to the government at a price that gave farmers no incentive to produce more than they could consume. The new policy permitted peasants to sell their products on the open market after meeting some obligatory transfers to the government. Its success led to the denationalization of small-scale industry, and even permitted foreign companies to build factories. Lenin insisted that the NEP had to be pursued "seriously and for a long time." Under NEP the Soviet economy revived reaching in the middle 1920s to its pre-war levels or close to it. A capitalist class was emerging, creating demands by ideological communists for an end to NEP. It was ended by Stalin in 1929, with tragic consequences for the independent farmers and ultimately for the Soviet Union itself.

If the orthodox communists in China behave similarly, China may have a similar experience. China has clearly adopted its own NEP which, if it learns from Russia’s experience, it will pursue “seriously and for a long time” at least until it surpasses its major competitor for world supremacy, the USA....

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How Keynes would save the euro
Howard Richman, 6/19/2012

World leaders are lending euros to the PIGS (Portugal, Italy, Greece and Spain); that won't work. They are trying to recapitalize the PIGS' banks; that won't work. The loans will simply flow out of the PIGS to buy imports.

The real problem is trade balances. In statistical terms, trade balances (i.e., current account balances) explain more than 40% of the variation in unemployment rate within euro-zone countries that have GDPs of at least $100 billion (and more than 20% of the variation worldwide). As shown in the graph below, all of the failing countries of the euro-zone have high unemployment rates and large trade deficits (as a percentage of GDP):

Keynes summarized the relationship between trade balances and unemployment in the chapter about mercantilism in The General Theory of Employment Interest and Money (1937):

(A) favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Less than 2 years before his death, negotiating for the United Kingdom at the Bretton Woods Conference, Keynes tried to create an international organization that would keep trade balanced. The resulting organization, the International Monetary Fund, has largely been a failure.

It doesn't even bother to enforce its own Articles of Agreement. For example, China and many other emerging market countries freely violate Article IV which prohibits "manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."

The organization that Keynes tried to create would have had different rules for trade deficit and trade surplus countries. Trade deficit countries would be allowed to charge tariffs, while trade surplus countries would be required to stimulate their demand for imports. Such rules are vitally needed in the euro-zone today.

If Keynes were in charge, Germany and the other trade surplus countries of the euro-zone would be required to stop charging their value-added tax on the products of the trade deficit countries of the euro-zone. Meanwhile, the trade deficit countries would be permitted to charge trade-balancing tariffs on the products of the trade surplus countries. These steps would lead to business investment in the trade deficit countries and save the euro.

The same principle applies to the rest of the world as well....

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Obama's Economic Stimulus Plans Are Actually Retarding Recovery
Raymond Richman, 6/15/2012

Obama’s economic stimulus plan, the American Recovery and Reinvestment Act of 2009, actually retarded the recovery rather than stimulated it.  The subsidies to alternative energy sources were counter-productive, increasing the federal budget deficit and increasing the cost of electricity to households and businesses, thus making a negative contribution to recovery. The so-called “Tax benefits” which amounted to nearly $300 billion to date allowed states, schools, municipalities, individuals and businesses to deleverage, to pay off some of their debts but made no contribution to employment. It may have saved the jobs of public employees – teachers, firemen, and police – which saved jobs but contributed nothing to recovery. As Prof. Tower of Stanford University notes in testimony before the Congress. when you look at what state and local governments did with the funds, you find that they did not increase purchases of goods and services or increase infrastructure projects. To date, the ARRA spent $226 billion on entitlements with no evident increase in consumption, and $234 billion on “contracts, grants, and loans”, including insulating house and factories, payments for  “junkers”, and subsidies for hybid cars and electric vehicles, and alternative energy.  

The administration claims that it created millions of jobs but counted the jobs created by other programs. The budget deficits in 2009, 2010, and 2011 ranged from $1.5 to $1.2 trillion which must have created some jobs, not to count the billions in tax credits to alternative energy projects and guarantees of loans to companies in alternative energy businesses. It includes the jobs created by the increase in bank loans made possible by TARP.  The budget deficits and the stimulus expenditures worsened our trade deficits causing millions of jobs to be outsourced to China and others.

The jobs created by all debt financed expenditures were anemic. Although the official rate of unemployment is 8.2%, there are millions employed part-time and millions who have left the labor force. New jobs cannot even keep up to the number of new entrants to the labor force each month.

Very little of the ARRA expenditures were made by the federal government itself. The amount allocated to infrastructure investment was trivial. It was the basis of one of Pres. Obama’s jokes, while holding a shovel at a ground-breaking ceremony  that next time we ought to really have shovel-ready infrastructure projects.  ...

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Book Review of Dick Morris and EileenMcGann, SCREWED! –How Foreign Countries Are Ripping America Off and Plundering Our Economy – and How Our Leaders Help Them Do It (Broadside Books, Harper Collins, 2012)
Raymond Richman, 6/9/2012

The movement toward world government has always had as it principal objective the weakening of the United State of America. As the authors state in their introduction, "A newly fashionable dogma of globalism –enthusiastic support for an economic and cultural view of “the world as one” – has supplanted a fundamental concern for the interests and needs of American citizens in the priorities of our national government."

The principal tool of the globalism strategy is international treaties.

In the G-20 whose decisions the US routinely agrees to is in effect a world legislature in which we have one vote and the European Union has five. The authors call it is “a German and French power grab.”  Moreover it includes countries like Turkey, Indonesia, Saudi Arabia, Argenina, S. Africa each with less than $1 trillion of GDP and Mexico and Korea with $1 trillion. The IMF, largely financed by the U.S., “working through the G-20 .. sets the policies the Fed is obliged to follow.” We do not control our trade policies, the World Trade Organization does that. We don’t control land use policies, the global environmentalists do that.

The authors take a dim view of all the treaties proposed by unelected international bureaucrats, particularly the proposed Law of the Sea treaty which besides requiring that half the royalties from offshore drilling are to go to the UN, require the U.S. to share its offshore drilling technology and limit the freedom of the seas of the U.S. Navy and our fishing vessels and a treaty creating an International Criminal Court whose authority would be above our own Supreme Court focusing on genocide, crimes against humanity, war crimes, and aggression. Endorsed by 112 nations but mainly directed against the US. UN envoys to the Climate Change Conference in Durban, SAfrica, recently proposed a global climate court which would inter alia require nations to cut emissions and compensate poor nations. Guess where the money would come from? ...

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Europe Is Committing Economic Suicide and So Is the United States
Raymond Richman, 6/6/2012

On Monday, June 4, 2012, we posted an article entitled The Undiscussed Measures That Would Result in an Economic Boom. We identified the loss of millions of jobs as a result of our trade deficits and environmental policies. These foolish policies are being ignored by economists, by the federal government, and by the media.  Recovery would be speedy and strong if we balanced our foreign trade and  ended the enormous subsidies to wind, solar, and biofuel energy. Imagine my pleasant surprise when two days later on Wednesday, June 6, theWall Street Journal published an article by Rael Jean Isaac, entitled “Europe’s Green  Energy Suicide”, in which she writes, “Unless Europe radically rethinks its obsession with carbon-dioxide emissions and the anti-fossil fuel energy policies that flow from it, growth is likely to remain elusive.” My point exactly and I was referring to the United States. ...

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The Undiscussed Measures That Would Result in an Economic Boom
Raymond Richman, 6/4/2012

Why have we not recovered from the recession? Because governments all around the world and particularly the USA have ignored the major causes of this recession. This depression was caused by the bursting of the housing bubble. The bubble was the result of the Community Reinvestment Act of 1977, sponsored by sentimental politicians who fell for leftist propaganda that the banks were systematically red-lining disadvantaged neighborhoods. The CRA was the wrong tool. The Fed was in effect forcing the banks to make loans to unqualified persons. It had the support of Democrats who wanted to enable the poor, especially blacks, to own their own homes and Republicans who wanted to enable more families to own their own homes. After all, home owners tend to be conservative. The CRA made blackmailers like ACORN rich and powerful. The loose lending policy led to the housing bubble.

Congress put in charge of administering the CRA the same Federal banking agencies that are responsible for keeping depository institutions healthy, namely, the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision(OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs. Paul Volcker was the Fed chairman at the time. Why he and his successor Alan Greenspan went along with legislation that made the Fed an agent to determine what loans the banks should make reflects on their understanding of how free markets are supposed to work. (See Wikipedia for more information about the CRA.) In any case, these supervisory agencies permitted the banks to to pay blackmail, to employ ACORN and other leftist groups as mortgage initiators, and to enncourage banks to make loans with little or no money down to everyone pretending to be a legitimate home buyer. The only duty of the Fed should be determining the supply of money needed for stable growth....

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Distinguished Economist Attacks Free Trade as Bankrupting the U.S.
Raymond Richman, 6/2/2012

One of the most creative people writing about international trade, is Professor Ralph Gomory. The book on comparative advantage that he wrote with Prof. William Baumol (Gomory, R. E., and W. J. Baumol, Global Trade and Conflicting National Interest, Cambridge,Massachusetts: MIT Press, 2000) is a modern economic classic. On May 22, 2012, he wrote in the Huffington Post (Mercantilism, Manufacturing, and a Political Problem):

"The modern Chinese government wisely exploits the fact that our great American companies take as their main mission in life to make as much money as possible for their shareholders. Companies can maximize profits by taking their technology and know how to China where they receive subsidies, in the form of tax breaks, shared investment, and undervalued currency. These are the factors that in high-tech manufacturing are far more important than lower wages. So our companies manufacture overseas and import the goods they once made in America back into the United States."

He asks what can we do to induce American companies to produce their products in the U.S.?

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